How to Use Goal-Based Investing to Fulfill Your Goals

Aug 08, 2018 | 3 months ago | Read Time: 4 minutes | By iKnowledge Team

Goal-based investing requires discipline and more so, thorough analysis. In the absence of exact tools in place, it can get tough to keep your goals on schedule. Although the trend of goal-based investing is fast catching up among young investors it can help to know how goal-based investing can work to put your goals into action.

Here’s how to plan your investments based on your individual goals:

1. What is goal-based investing?

Goal-based investing is when you plan your investments based on your financial goals in a structured manner. And you will know exactly where your money is being invested and how it will yield results.  To get the best out of goal-based investing, jot down your goals and create a timeframe. There are three timeframes for goal investing:

  • short-term (few months to a year)
  • mid-term (one to five years)
  • long-term (more than five years)

2. Take a closer look at your portfolio

 Here’s an example of Rohit’s assets. He is a sole earner who brings home a salary of Rs. 75,000 every month. He lives with his family in his own house in Bangalore. After all the monthly expenses like household, children’s education, contribution to parents, insurance premium, home loan EMI and investments, he is left with a surplus of only Rs. 500. He plans to buy a car, save for an emergency, children’s higher education, and their weddings and build a retirement corpus. After adding all his assets (amounting to Rs. 52,37,400) and deducting the liabilities, Rohit’s net worth stands at Rs. 42,37,400.  

PORTFOLIO

Asset                                                              Current Value (in Rs.)

 

Real Estate                                                         30 lakhs

 

Cash                                                                      15,000

 

Debt                                                                          –

 

EPF                                                                       4.28 lakhs

 

FD                                                                           8 lakhs

 

PPF                                                                       44,400

 

Debt Funds                                                         30,000

 

Equity                                                                      –

 

Balanced Funds                                                 9 lakhs

 

Stocks                                                                  35,000

 

Total                                                                    52,37,400 lakhs

 

Liabilities

 

Home loan                                                          10 lakhs

 

Total liability                                                      10 lakhs

 

Net worth                                                           42,37,400

3. Cash flow of Rohit’s Expenses

CASH FLOW

Existing

Suggested

INCOME

75,000

79,000

 

Household expenses

15,000

15,000

 

Children’s education

 

2,000

 

2,000

 

Contribution to dependents

 

11,000

 

11,000

 

Home loan EMI

 

10,000

 

10,000

 

Insurance Premium

 

3,500

 

6,500

 

Investment

 

33,000

 

34,500

 

Total outflow

 

74,500

 

79,000

 

Surplus

 

500

 

4. How can you plan your goals?

Evaluate your goals and chart a plan accordingly. This could include working out how much money you need to fund your goal, how much will be needed to invest monthly or at one go, choosing the best product for that goal.

For instance, Rohit can start by building an emergency fund, and by investing in a short-term fund. He needs Rs. 36 lakhs and 47 lakhs in 12 and 19 years, respectively for his children’s education.

Here’s an estimate of his goals and how he can reach them. He must earn an additional Rs. 4,000 to reach his goals. To meet the goals of his children’s education, he can invest in mutual funds every month for Rs. 9000 and Rs. 6000 in separate plans. He can use SIP plans to invest for his children’s weddings by investing Rs. 2,500 and Rs. 2,000 every month.

GOAL

FUTURE COST/

TIME TO ACHIEVE

RESOURCES

USED

INVESTMENT NEEDED EVERY MONTH

 

Emergency corpus

 

 8 lakhs/7 years

 

Fixed Deposit

 

Buying a car

 

6 lakh/5 years

 

10,000

 

1st child’s education

 

36 lakh/12 years

 

Mutual funds

 

9,000

 

 

2nd child’s

Education

 

47 lakh/19 years

 

Mutual funds

 

6,000

 

1st child’s

Wedding

 

18 lakh/16 years

Mutual funds

 

2,500

 

2nd child’s

Wedding

 

24 lakh/23 years

Mutual funds

 

2,000

 

Retirement

 

3 crore /26 years

PPF, EPF, stocks,

Mutual funds

5,000

 

Investible surplus needed

 

 

 

34,500

5. What about insurance goals?

Rohit already has a term plan for Rs. 50 lakhs, but can get better coverage if he buys another term plan that offers coverage of Rs. 50 lakhs. Rohit can also improve the coverage of his health insurance.  He has a Rs. 3 lakh floater plans for his family and a Rs.1 lakh cover for his parents. He must raise the family cover to Rs. 10 lakhs for better protection. As of now, his insurance portfolio lacks critical illness cover and accident disability cover.  So, he could add them by picking a Rs. 25 lakh critical illness cover and a Rs. 25 lakh accident disability plans for Rs. 1,000 a month.

 

Insurance

Existing cover

Existing monthly premium

 

Suggestions

Suggested monthly premium

Life insurance

Term plan (1)

50 lakhs

1500

Retain the term plan, buy Rs. 50 lakh term plans

1000

Traditional plan

–               

ULIP

–               

–               

TOTAL

50 lakhs

1,500

1 crore

2,500

Health Insurance

Employer’s

Own

 

3 lakh + 1 lakh (parents)

 

Rs. 1,500

Buy Rs. 10 lakhs for family and 3 lakhs for parents

Rs. 1,750 +

Rs. 1,250

TOTAL

 

4 lakhs

 

Rs. 1,500

 

 

Rs. 3,000

Critical illness and accident disability

 

 

Buy Rs. 25 lakh critical illness + Rs. 25 lakh accident disability plans

 

 

Rs. 1,000

TOTAL

 

 

 

 

Rs. 1,000

Insurance cost

 

 

Rs. 3,300

 

 

Rs. 6,500

6. What are the benefits of goal-based investing?

Goal-based investing helps you achieve your goals like a second car, an overseas vacation, child’s education, wedding, travel, a second home, etc. It also sets a clear deadline, aids in selecting the right products for your needs and helps you check if you’re on the right path.

To sum it up:

Investing is important for a secure financial future, but it is just as crucial to fulfill your goals by making the most of your hard-earned money. With goal-based investing, you can plan your finances in such a way that it meets your individual needs.

Advt. no.: IA/Jul 2018/4247


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